Case 5: Early in the year, Fabulous Recreation, a leading manufacturer of quality recreational equipment, put...

 

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Case 5: Early in the year, Fabulous Recreation, a leading manufacturer of quality recreational equipment, put some idle cash to work by investing in marketable securities, so of which later advanced in price while others declined. The securities were recorded at cost. In November, Mikhail Martinoff, president of Fabulous Recreation, decided to dispose of all the securities. The securities were actively traded on the Big Board, with Fabulous' holdings only a minor fraction of the normal daily volume. As of November 10, Information showed: Cost Market $40,000 Appreciated securities Depreciated securities Total $70,000 27,000 40,000 $80.000 $97.000 Because Fabulous prepares financial statement only at year-end, no gains or losses have been recognized for any of the securities. President Martinoff is considering five possible means for disposing of the marketable securities: 1. Sell for cash. 2. Use to satisfy liabilities 3. Distribute to stockholders as a dividend 4. Use to pay executive bonuses 5. Donate to a charity He has told the controller that his decision about which course of action to take will depend in part on how much gain or loss will be recognized as a result of the disposal option he chooses. Required: 1. How much gain or loss should Fabulous recognized under each of the five options for disposing of the assets? 2. Should the amount depend on the means of disposal? Case 5: Early in the year, Fabulous Recreation, a leading manufacturer of quality recreational equipment, put some idle cash to work by investing in marketable securities, so of which later advanced in price while others declined. The securities were recorded at cost. In November, Mikhail Martinoff, president of Fabulous Recreation, decided to dispose of all the securities. The securities were actively traded on the Big Board, with Fabulous' holdings only a minor fraction of the normal daily volume. As of November 10, Information showed: Cost Market $40,000 Appreciated securities Depreciated securities Total $70,000 27,000 40,000 $80.000 $97.000 Because Fabulous prepares financial statement only at year-end, no gains or losses have been recognized for any of the securities. President Martinoff is considering five possible means for disposing of the marketable securities: 1. Sell for cash. 2. Use to satisfy liabilities 3. Distribute to stockholders as a dividend 4. Use to pay executive bonuses 5. Donate to a charity He has told the controller that his decision about which course of action to take will depend in part on how much gain or loss will be recognized as a result of the disposal option he chooses. Required: 1. How much gain or loss should Fabulous recognized under each of the five options for disposing of the assets? 2. Should the amount depend on the means of disposal?

Answer rating: 100% (QA)

1 Selling for Cash would bring a total inflow of 70000 27000 9700... View the full answer